Dec. 14 (Bloomberg) -- London’s Heathrow airport, hemmed in
by urban sprawl and barred from adding a new runway, is turning
to bigger jets and glitzier shops to keep growing in the face of
a campaign to build a rival hub on the Thames estuary.

Heathrow owner BAA Ltd. will widen taxiways to handle more
A380 jets, adding seats, while an upgrade of its oldest terminal
should lift retail sales, Chief Executive Officer Colin Matthews
said in an interview. A government pledge to maintain a global
hub in the U.K. may signal an easing of antipathy toward
expanding the busiest international airport, Matthews said.

“Until the last year, very senior people were arguing that
transfer traffic wasn’t important,” he said. “They’re not saying
that now. There’s an understanding that to give business people
starting or ending their journey in London the frequencies and
destinations they want you have to fill the rest of the plane.”

Chancellor George Osborne said Nov. 29 the government will
“explore all options” for retaining a U.K. hub, a positive
remark according to Matthews, before adding “with the exception
of a third runway at Heathrow.” The qualification could suggest
he favors an airport at the mouth of the Thames, where noise
would be less intrusive, as proposed by fellow Conservative and
London Mayor Boris Johnson. Architect Norman Foster, designer of
Hong Kong airport, has also drawn up plans for a coastal site.

Reducing Noise

Matthews, 55, said in London that with the government
seemingly persuaded that a hub is vital to the economy, BAA’s
No. 1 task is to convince lawmakers and officials that Heathrow
can raise its capacity without disrupting people’s lives.

“People feel really strongly about noise and we have to do
a better job of getting an understanding of that story on the
table,” he said. “It’s about quieter engines and airframes,
different landing technologies and ways of operating the
airport, about flight paths and the time of day you operate.”

A small aerodrome in open country when chosen as London’s
main airport after World War II, Heathrow, located 14 miles west
of the city center, is now part of Europe’s biggest urban area.

Heathrow’s runways also run east-west, so in prevailing
winds planes descend over London 70 or 80 percent of the time,
taking off above the city on remaining occasions. Paris Charles
de Gaulle and Frankfurt airports are north and south of the
urban areas they serve, so jets don’t affect residents as much.

‘Uncomfortable Truth’

A third runway, as proposed by BAA, would lift Heathrow’s
capacity of 480,000 flights a year by 50 percent, Matthews said,
allowing passenger numbers to almost double from a maximum 68
million based on existing aircraft sizes to about 130 million.

Prime Minister David Cameron’s government, which includes
pro-environment Liberal Democrats, blocked the plan after taking
power in 2010. It also opposes more capacity at London Stansted,
which an antitrust ruling may force BAA to sell, and Gatwick,
the busiest single-runway airport, which it disposed of in 2009.

While the Department for Transport is evaluating a new
aviation policy, it’s headed by Justine Greening, who represents
a district located directly under the Heathrow flight path and
has previously been a vocal campaigner against expansion plans.

Matthews says complaints from well-heeled suburbs ignore
the “slightly uncomfortable truth that one of the features that
makes them attractive is their connectedness to Heathrow.”

“The Conservatives are clearly against the idea of a third
runway, so I don’t see any chance of it happening over the next
three years, and possibly longer than that,” he said.

A380 Splurge

While it waits for the political tide to turn, BAA, bought
by Spanish builder Ferrovial SA for 10 billion pounds ($16
billion) in 2006, will spend hundreds of millions of pounds to
lift the number of Airbus A380s Heathrow can handle to 35 a day.

Heathrow currently offers six daily flights on the 525-seat
plane, two each by Singapore Airlines Ltd., Qantas Airways Ltd.
and Emirates of Dubai, which has ordered 90 of the jets. British
Airways, based at the airport and its No. 1 carrier, will start
taking delivery of 12 of the double-deckers starting in 2013.

“With all those A380s we need to have more stands, but
they’re wider than other aircraft and the taxi layout needs to
be different,” Matthews said. “It’s expensive, it’s not quick,
and it won’t be hugely visible, but the plane gives an increase
in the number of passengers without any increase in movements.”

Happy Spenders

BAA is also spending 2.6 billion pounds renewing Heathrow’s
Terminal 2, built in 1955. Due for completion in 2013, the plan
is aimed at creating a lighter, airier space offering a more
streamlined passenger check-in experience, and will add no
capacity. Matthews said the investment will pay off by boosting
retail sales that contribute one-quarter of revenue.

“There’s a strong correlation between retail spending and
the customer rating of the quality of security,” he said. “I
won’t buy a tie or a bag unless I’m relaxed. If I’ve just been
really aggravated in security I won’t, if I’m delayed I won’t.”

BAA is also in talks with airlines about demolishing 42-year-old Terminal 1 and integrating it with Terminal 2, Matthews
said. The six-year plan will create a complex handling 30
million people a year, matching BA’s base at Terminal 5, which
had a chaotic opening in 2008 weeks before the CEO took over as
baggage systems broke down, earning the sobriquet “Heathslow.”

‘Rearranging the Furniture’

Matthews said runway capacity remains the ultimate concern,
and Heathrow is already feeling the strain, falling from second
to fourth by passengers in 2010 as the total slid 0.2 percent to
65.9 million, overtaken by Beijing with 13 percent growth and
Chicago with 4.1 percent. Atlanta remained the world No. 1.

“There has been this kind of stasis gripping London’s
airports over the last 25 or 30 years,” said Peter Morris,
chief economist at London-based aviation consultants Ascend.
“The furniture has been rearranged quite dramatically, but no
new airports or runways have been built. All they’ve done is
spread things round old air bases from the Second World War.”

While Heathrow is still Europe’s busiest airport, it serves
only 180 destinations -- down from 227 in 1990 -- as airlines
focus slots on the most profitable routes, versus more than 250
at Amsterdam, CDG and Frankfurt, which all have four runways.

“If we take too long over the debate we are, by default,
making a choice,” Matthews said. “Paris and Amsterdam will do
the jobs that could otherwise be happening here.”

The sale of a 5.9 percent stake in BAA to infrastructure
firm Alinda Capital Partners for 280 million pounds on Oct. 10
valued it at 4.76 billion pounds, less than half the 2006 price.
Ferrovial, which has a 49.99 percent stake, fell 1.5 percent to
8.99 euros in Madrid today, paring gains in 2011 to 21 percent.

Less Anger

Mayor Johnson has said he, too, is concerned about London’s
shrinking global connections and the relative paucity of links
with emerging markets in Asia, while maintaining that “massive
environmental dis-benefits” mean expanding Heathrow won’t do.

Johnson instead favors a 30 billion-pound hub dubbed “Boris
Island,” to be built at Shivering Sands, off Whitstable in Kent.
Architect Foster’s Thames Hub would be located closer to London
on the Isle of Grain. Both feature four runways, 24-hour flying,
high speed rail links and capacity of 150 million people a year.

“There are people who dislike the concept of developing an
airport in a relatively unspoiled location, but I don’t see the
public anger that was evident with the third runway at Heathrow,
or extending Gatwick or Stansted,” BGC’s Wheeldon said.

Fantasy Island

Travelers interviewed in London were split on the merits of
an airport in the Thames estuary, which would require the bulk
of Britons to make a journey across or around the U.K. capital.

“It’s on the wrong side of London,” said Rob Nunn, 35, a
resource manager at a professional services firm. “It seems like
a bit of a fantasy and can’t imagine how it could work. Maybe we
need the other runway at Heathrow -- I’d prefer that.”

Matt Maleavy, 32, a senior manager at a City investment
bank who lives in Essex, east of London and closer to Johnson’s
preferred site, reckons a replacement of Heathrow is inevitable.

“There’ll be a requirement for another airport because
business travel needs it,” he said. “We don’t compete enough
with other global cities.”

Matthews said a coastal hub would take 25 years to deliver
and come with a price tag that could prove to be Heathrow’s
biggest advantage in its own push for additional capacity.

“Sooner or later people have got to put numbers on the
table and figure out what the costs and benefits are,” he said.
“If a new airport ends up costing four times more than investing
in Heathrow, landing charges are going to be four times higher.”